WHEN: Today, Friday September 8, 2017
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with New York Fed President William Dudley on CNBC's "Squawk on the Street" (M-F, 9-11am ET) today, Friday, September 8, 2017. Following are links to three excerpts of the interview on CNBC.com: https://www.cnbc.com/video/2017/09/08/ny-feds-dudley-hurricanes-will-boost-economic-activity-in-the-long-run.html, https://www.cnbc.com/video/2017/09/08/ny-feds-dudley-expect-balance-sheet-unwinding-to-happen-very-soon.html, https://www.cnbc.com/video/2017/09/08/ny-feds-dudley-new-fed-members-still-bound-by-mandate.html.
All references must be sourced to CNBC.
SARA EISEN: LET'S SEND IT OVER NOW TO STEVE WHO IS UP IN NEW YORK FEDERAL RESERVE SITTING DOWN WITH A VERY SPECIAL GUEST. STEVE OVER TO YOU.
STEVE LIESMAN: SARA THANK YOU VERY MUCH. I AM HERE INSIDE THE FEDERAL RESERVE BANK WITH FEDERAL RESERVE BANK PRESIDENT WILLIAM DUDLEY. THANKS FOR JOINING US.
WILLIAM DUDLEY: THANKS FOR HAVING ME.
LIESMAN: LET'S PICK UP WITH THE IMPENDING IMPACT OF THIS MASSIVE HURRICAN WE JUST HAD HARVEY MASSIVE POTENTIAL FOR DAMAGE FOR IRMA HOW DO YOU THINK ABOUT THE EXISTING DAMAGE TO THE ECONOMY AND THE POTENTIAL DAMAGE
DUDLEY: FIRST WE HAVE TO TALK AOUT THE HUMAN TOIL AND ALL THE PEOPLE THAT ARE GOING TO SUFFER FROM HARVEY AND IRMA AND THEN IF YOU BACK OUT FROM THAT AND THINK ABOUT THE ECONOMIC CONSEQUENCES, FIRST CONSEQUENCE IS IT ACTUALLY PUSHES DOWN ECONOMIC ACTIVITY BECAUSE IT DISRUPTS COMMERCE THE ABILITY OF PEOPLE TO DO THEIR BUSINESS ALSO TEND TO PUSH UP PRICES INITIALLY. WE SAW IN HURRICANE HARVEY A BIG INCREASE IN GASOLINE PRICES BUT THOSE EFFECTS TEND TO BE PRETTY TRANSITORY THE LONGER RUN EFFECT OF DISASTER UNFORTUNATLEY IS THAT IT ACTUALLY LIFTS ECONOMIC ACTIVITY BECAUSE YOU HAVE TO REBUILD ALL THE THINGS DAMAGED BY THESE STORM WHEN WE THINK ABOUT THE IMPACT OF THESE STORMS FIRST OF ALL ITS GOING TO MAKE IT DIFFICULT TO READ THE ECONOMIC DATA OVER THE NEXT FEW MONTHS BECAUSE ITS GOING TO BE HARD TO KNOW EXACTLY WHAT THE DATA WOULD HAVE BEEN -- THE HURRICANES AND SECONDLY WILL END UP BOOSTING THE ECONOMY AS WE GET TO LATER THIS YEAR.
LIESMAN: I HATE TO ASK THIS BUT IS THERE A POINT IN WHICH A STORM BECOMES SO DAMAGING THAT THE NORMAL RULES THAT WE TALK ABOUT WHICH IS THIS DIP AND THIS RETURN DON'T NECESSARILY APPLY? I KNOW IT HIT SANDY AND NOW IT IS BACK FROM THAT WITH LITTLE EFFECT BUT THE TRAJECTORY OF THIS STORM LOOKS DIFFERENT.
DUDLEY: WELL IT COULD STRETCH OUT THAT PERIOD OF DISRUPTION THE AMOUNT OF TIME IN WHICH THE STORMS HAVE NEGATIVE EFFECTS ON THE ECONOMY COULD BE LONGER IF THE DISRUPTION IS MORE SEVERE AND WIDESPREAD.
LIESMAN: AS A RESULT OF HARVEY HAVE YOU PARKED DOWN YOUR THIRD QUARTER GROWTH NUMBERS.
DUDLEY: WELL PROBABLY TAKE THEM DOWN JUST A TOUCH BECAUSE THERE IS DEFINITELY SOME EFFECT ON THINGS LIKE REFINING AND RETAIL ACTIVITY IN THE HOUSTON AREA ESPECIALLY.
LIESMAN: THAT SAID, GETTING HIT BY STORMS AT THIS POINT IN TIME THE CURRENT ECONOMY RUNNING A BIT ABOVE TREND. ARE YOU OVERALL MORE OPTIMISTIC ABOUT THE OUTLOOK ON THE ECONOMY?
DUDLEY: I THINK IF YOU EXTRACT FROM THESE STORMS THE UNDERLYING TRAJECTORY OF THE US ECONOMY IS PRETTY SIMILAR TO WHAT IT'S BEEN. A BIT ABOVE TREND AND AT THE MARGIN LOOKS LIKE THE ECONOMY MIGHT BE GATHERING STRENGTH A LITTLE BIT I THINK THE ECONOMY IS GETTING HELP BY THE FACT THAT ONE FINANCIAL CONDITIONS ARE QUITE BUOYANT. THE STOCK MARKET HAS BEEN FIRM LONG-TERM YIELDS HAVE FALLEN THE DOLLAR HAS WEAKENED A LITTLE BIT WHICH IMPROVES U.S. TRADE AND THE SECOND THING THE REST OF THE WORLD LOOKING BETTER WE HAD A PRETTY STRONG QUARTER OF GROWTH IN THE REST OF THE WORLD IN THE SECOND QUARTER AND SO I THINK THATS PROVIDING SUPPORT TO THE U.S. ECONOMY.
LIESMAN: DOES THAT CAUSE YOU TO LIFT YOUR POTENTIAL MARGINS IT HAS BEEN THE SAME BORING 2% FOR YEARS AND YEARS AND YEARS BUT NOW WE ARE DOING 2.6, 2.8 MAYBE ANOTHER ONE JUST LIKE THAT WHICH IS A BIT ABOVE.
DUDLEY: I WOULD SAY TOO SOON TO SAY. REMEMBER WE HAVE HAD THESE WEAK FIRST QUARTERS IMPROVING SECOND AND THID QUARTER SO I WOULD SAY TOO SOON TO SAY. BUT AT THE MARGIN IM PRETTY OPTIMISTIC THAT THE EXPANSION IS GOING TO CONTINUE IM PRETTY CONFIDENT THAT IT'S GOING TO CONTINUE AT THE ABOVE TREND PACE AND THATS WHY I THINK AS TIME PASSES THE FEDERAL RESERVE WILL CONTINUE TO GRADUALLY REMOVE MONETARY POLICY ACCOMMODATIONS.
LIESMAN: YOU SAID FINANCIAL CONDITIONS ARE BUOYANT AND THEN YOU JUST SAID REMOVE ACCOMODATION THOSE THINGS ARE WORKING OPPOSITE TO WHAT THE FED WOULD APPEAR TO INTEND, RIGHT? YOURE TRYING TO MAKE THINGS A LITTLE TOUGHER AND YET THEYRE GETTING EASIER THIS MORNING WE HAVE A TEN YEAR, I THINK IT HIT 202 IS THAT A CONCERN FOR A FEDERAL RESERVE BANK THATS TRYING TO MAKE CONDITIONS TIGHTER AND RAISE INTEREST RATES IN THE ECONOMY?
DUDLEY: I DONT THINK IT CREATES A HUGE PROBLEM FOR US RIGHT NOW BECAUSE INFLATION IS BELOW OUR 2% OBJECTIVE IF INFLATION WAS ABOVE OUR 2% OBJECTVE I'M SURE WE WOULD BE FRUSTRATED BY THE FACT THAT WE ARE TRYING TO REMOVE MONETART POLICY ACCOMODATIONS AND FINANCIAL CONDITIONS ARE BECOMING EASIER BUT WITH INFLATION BELOW OUR 2% OBJECTIVE I THINK IT ALLOWS US TO BE MORE PATIENT.
LIESMAN: PATIENT WITH WHAT YOU HAVE TWO POLICY TOOLS THAT YOU ARE TALKING ABOUT. THE FIRST IS REDUCING THE BALANCE SHEET AND THE SECOND IS RAISING INTEREST RATES ARE YOU GOING TO BE MORE PATIENT WITH BOTH OF THOSE BECAUSE OF WHATS HAPPENING
DUDLEY: I THINK THE BALANCE SHEET I THINK THAT'S LIKELY TO HAPPEN RELATIVELY SOON. IN JUNE WE ANNOUNCED WHAT THE PLAN WAS EXPECTATIONS ARE THAT WERE LIKELY TO COMMENCE WITH THE PLAN IN THE NEAR FUTURE. I DONT SEE ANY REASON NOT TO DO THAT THE MARKET RESPONDED TO THE NOTION OF US TAKING DOWN OUR BALANCE SHEET SIZE GRADUALLY OVERTIME IN A VERY VERY MILD CONTROLLED WAY SO I WOULD EXPECT THAT TO HAPPEN SOON. IN TERMS OF INCREASING SHORT-TERM INTEREST RATES ITS GOING TO DEPEND ON HOW THE ECONOMY INVOLVES THERES CROSS CURRENTS ON ONE HAND THE ECONOMY IS GROWING ABOVE TREND AND THAT APPLIES WE NEED TO CONTINUE TO REMOVE ACCOMMODATION ON THE OTHER HAND INFLATION IS BELOW OUR TARGET FARTHER BELOW OUR TARGET THAN WE ANTICIPATED AND WE ALSO HAVE A VERY EASY FINANCIAL CONDITION SO I THINK ITS TOO SOON TO JUDGE, YOU KNOW, EXACTLY THE TIMING OF WHEN THE NEXT RATE HIKE MIGHT OCCUR BUT I THINK THE PATH IS STILL CLEAR THAT SHORT-TERM RATES ARE GOING TO MOVE GRADUALLY HIGHER OVER TIME.
LIESMAN: I WANT TO GET TO THIS BROADER DISCUSSION IN A SECOND BUT COME BACK TO THE STORM. DOES THE STORM HARVEY THAT WE HAD, WITH THE POTENTIAL FOR IRMA, DO THEY HAVE THE ABILITY TO CAUSE YOU TO DELAY OR OTHERWISE PUT OFF SOME OF THE POLICY TOOLS YOU WANT TO DO?
DUDLEY: I DON'T THINK THEY'LL HAVE ANY MEANINGFUL EFFECT ON THE BALANCE SHEET NORMALIZATION DECISION. IT'S POSSIBLE THEY COULD HAVE EFFECT ON THE TIMING OF SHORT-TERM RATE INCREASES, BUT I THINK THAT'S PROBABLY FURTHER OUT ANYWAY. SO I WOULD SUSPECT WHEN WE GET TO THE END OF THE YEAR AND EARLY 2018, THE TRANSITORY NEGATIVE EFFECTS I THINK WILL BE OVER AND WE'LL ACTUALLY BE STARTING TO SEE SOME OF THE BENEFITS OF THE REBUILDING EFFORTS IN TERMS OF BOOSTING THE ECONOMY.
LIESMAN: ONE OF THE THINGS THAT'S – THAT'S OUT THERE IS THIS RELATIONSHIP, WHICH IS A BASIS OF CENTRAL BANKING. TIGHT UNEMPLOYMENT, HIGHER WAGES LEADS TO HIGHER INFLATION. THAT'S NOT WORKING. HOW SKEPTICAL SHOULD PEOPLE BE ABOUT WHAT THE CENTRAL BANKS THINK THEY KNOW ABOUT THE PROCESS OF INFLATION?
DUDLEY: WELL I THINK WE STILL BELIEVE IF YOU MAKE THE ECONOMY TIGHT ENOUGH YOU'RE GONNA GET HIGHER WAGES AND THAT'S GOING TO GENERATE HIGHER INFLATION. THE QUESTION IS WHAT DEGREE OF TIGHTNESS? SO IT'S POSSIBLE THAT STRUCTURAL CHANGES IN THE NATURE OF HOW FIRMS COMPETE WITH EACH OTHER AND CONTRIBUTE GOODS AND SERVICES IS PUTTING DOWNWARD PRESSURE ON INFLATION. IF THAT'S THE CASE THAT WOULD MEAN WE COULD ALLOW THE ECONOMY TO RUN AT A LOWER UNEMPLOYMENT RATE. THAT WOULD BE A GOOD THING AND NOT A BAD THING.
LIESMAN: GOOD. SO STOP THERE. HOW LOW? IT'S BEEN DOWN TO 43, IT'S NOW UP TO 44. CAN YOU SEE 3'S ON THE UNEMPLOYMENT RATE AND NOT BE TOO CONCERNED ABOUT INFLATION?
DUDLEY: I MEAN, WE'LL HAVE TO SEE OVER – IN THE FULLNESS OF TIME. I WOULDN'T WANT TO YOU KNOW, MAKE A FORECAST ABOUT WHERE THE UNEMPLOYMENT RATE CAN BE ALLOWED TO GO. I THINK WE'RE GOING TO LEARN A LOT OVER THE NEXT SIX MONTH IN TERMS OF WHAT INFLATION DOES. WE' VE SEEN A NUMBER OF VERY LOW READINGS ON INFLATION THROUGH THE SUMMER. THAT'S PULLED DOWN THE YEAR OVER YEAR HEADLINE INFLATION NUMBERS CONSIDERABLY AND THE CORE INFLATION NUMBERS CONSIDERABLY. THE QUESTION IS, IS THAT TRANSITORY OR IS THAT SOMETHING THAT'S GOING TO BE MORE PERSISTENT? I THINK THE NEXT THREE TO SIX MONTHS WILL GIVE US GOOD ANSWERS TO THAT QUESTION.
LIESMAN: WE'RE TALKING ABOUT BROAD POLICY BUT OF COURSE PEOPLE MAKE POLICY AND THERE ARE, STAN FISCHER THE VICE CHAIRMAN, JUST ANNOUNCED THAT HE IS GOING TO BE RESIGNING EFFECTIVE OCTOBER. SEVERAL VACANIES ON THE BOARD. WHAT'S THE CHANCE THAT PERSONNEL COULD COME IN AND VASTLY CHANGE THE POLICY AT THE FEDERAL RESERVE?
DUDLEY: WELL YOU KNOW, OBVIOUSLY, PEOPLE MAKE POLICIES SO YOU CHANGE THE PEOPLE, YOU COULD POTENTIALLY GET A DIFFERENT POLICY OVER TIME. BUT IT'S IMPORTANT TO RECOGNIZE A COUPLE OF THINGS. NUMBER ONE THE MANDATE FOR THE FED IS VERY CLEAR. MAXIMUM SUSTAINABLE EMPLOYMENT IN THE CONTEXT OF PRICE STABILITY. SO IF YOU'RE JOINING THE FED, THAT'S YOUR MANDATE AND YOU'LL PROBABLY WANT TO FOLLOW A PRETTY SIMILAR SET OF POLICIES TO ACHIEVE THAT MANDATE AS THE EXISTING TEAM. THE SECOND THING IT'S A COMMITTEE. ITS NOT JUST ONE OR TWO PEOPLE. SO I THINK THAT YOU WOULD REALLY HAVE TO CHANGE OUT A LOT OF PEOPLE AND THOSE PEOPLE HAVE TO HAVE VERY DIFFERENT VIEWS ABOUT HOW THE ECONOMY IS OPERATING. I THINK TO HAVE A SIGNIFICANT CHANGE IN TERMS OF THE TRAJECTORY OF US MONETARY POLICY.
LIESMAN: SHOULD PRESIDENT TRUMP REAPPOINT JANET YELLEN?
DUDLEY: I THINK JANET HAS DONE A GREAT JOB. I THINK SHE WOULD BE A TERRIFIC CANDIDATE TO BE REAPPOINTED.
LIESMAN: WHAT ABOUT GARY COHN? A GUY WHO IS A FINANCIAL GUY?
DUDLEY: I'M GOING TO STICK TO JANET.
LIESMAN: STICKING TO JANET NOW. OK, LAST QUESTION I WANT TO ASK YOU IS ABOUT REGULATORY REFORM. ONE OF THE THINGS THAT THE PRESIDENT HAS BEEN VERY INSISTENT ON IS RELAXING THE DODD FRANK REGULATIONS. JAMIE DIMON BACK IN APRIL IN HIS LETTER TO SHAREHOLDERS SAID, "BANKS CAN USE MORE OF THEIR CAPITAL TO FINANCE THE ECONOMY WITHOUT SACRIFICING SAFETY AND SOUNDNESS." THE CHAIR AT JACKSON HOLE SAID, YOU KNOW WHAT, IT'S THE REGULATIONS THAT UNDERPIN THE ECONOMY. CAN THE RULES AND REGULATIONS AROUND BANK CAPITAL BE RELAXED? AND WOULD THAT HAVE A POSITIVE EFFECT ON THE ECONOMY? WOULD YOU FAVOR THAT?
DUDLEY: SO I THINK THE CAPITAL AND THE LIQUIDITY REGULATIONS WE'VE PUT IN PLACE AFTER POST THE FINANCIAL CRISIS ARE ACTUALLY CRITICAL TO HAVE A STRONG ECONOMY, A SUSTAINABLE ECONOMY OVER TIME. SO I WOULD NOT WANT TO ROLL THE LIQUIDITY AND CAPITAL REGULATIONS, ESPECIALLY ON THE LARGE FINANCIAL INSTITUTIONS. I THINK YOU COULD HAVE SOME RELIEF FOR SMALLER BANKING INSTITUTIONS WHICH ARE NOT SYSTEMIC AND IF THE FAIL THEY DON'T PUT THE FINANCIAL SYSTEM AT RISK. SO YOU WANT TO BE CAREFUL ABOUT HOW FAR YOU GO. THE FINANCIAL CRISIS WAS HORRIBLE. IT ONLY HAPPENED TEN YEARS AGO. I THINK IT'S A LITTLE SOON TO SAY OH LET'S JUST FORGET ABOUT ALL THE BAD THINGS THAT HAPPENED. WHAT YOU WANT TO HAVE IS A FINANCIAL SYSTEM THAT'S STRONG ENOUGH TO WITH STAND SUBSTANTIAL SHOCKS AND TO DO THAT YOU NEED ADD EQUATE CAPITAL AND LIQUIDITY. SO I WOULD BE VERY RELUCTANT TO ROLL THAT PART OF THE REGULATORY REGIME BACK.
LIESMAN: WILLIAM DUDLEY, THANKS FOR JOINING US THIS MORNING.
DUDLEY: THANK YOU, STEVE.
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